Internet Tax Focus Of Government Greed

Dean F. Andal

Published
4:00 am PST, Monday, March 20, 2000

EXPLOSIVE GROWTH of the Internet and electronic commerce has created new jobs and access to a wide variety of products, services and information. This revolution is in danger of being stopped dead in its tracks by greedy tax officials from state and local governments.

Under the guise of "protecting Main Street retailers," state and local governments are urging Congress to force Internet sellers to collect sales taxes wherever their customers are located. Congress is being asked to pass the equivalent of a $4.5 billion tax increase on consumers when 70 percent of online users polled this month by the company @plan,inc., opposed such taxes. The scheme would also force Internet sellers to keep track of taxes in over 30,000 local tax jurisdictions and file tax returns and be audited by states and localities they have never visited.

None of the arguments excusing this unjustified tax grab is supported by the facts. Electronic commerce is not a threat to local coffers. California, with the most e-commerce-friendly tax laws in the nation, had sales tax revenue growth at an annual rate of 5.7 percent -- an increase of one-third in less than five years. This extraordinary increase in sales tax revenue came from traditional retailers of goods, despite Californians' huge appetite for Internet purchasing.

There is no evidence that an "untaxed" e-commerce threatens adequate revenues for government services. Nor does the rise of e-commerce threaten small businesses. The Internet is the one place where small entrepreneurs can compete on equal footing with major corporations. A good idea and nifty Web site allows a small bookseller to actually scare Barnes & Noble.

Internet retailers do not enjoy special "tax-free" status, they are held to the same standard as everyone else and must collect taxes where they have a physical presence.

The U.S. Supreme Court in the 1992 Quill case held that one state cannot impose tax collection obligations on a business in another state unless that seller has a substantial physical presence ("nexus") in that state. The Quill decision recognized, as did drafters of our Constitution, that it is sometimes necessary to limit state authority to prevent the gridlock of interstate commerce.

From a retailer's perspective, the possibility of gridlock is not mere speculation. There are more than 7,000 sales and use tax rates in the United States, and about 700 changes occur in those rates every year.

Keeping up with the appropriate tax rate (assuming you know where the customer is located) would impose a substantial barrier to the Internet marketplace. Americans do not believe that Internet businesses should devote their scarce capital and management time to tax compliance, rather than growth. We should not greet a new Internet entrepreneur with a welcome wagon of tax-registration forms.

Instead, my proposal would apply the principle of the Quill decision to the Internet and demand the same test, of a substantial physical presence in a state, before imposing a sales tax.

The definition of a physical presence would provide clarity, predictability and uniformity. It would prevent state and local governments from trying to claim that tangential operations, like the maintenance of a Web site on a server in a jurisdiction, meet the Quill test.